• The US Dollar is on the back foot and it’s not only a “flash crash”.
• The move is broad, with commodity currencies also taking advantage of the fall.
• There are three reasons for the fall.

Cascading stops in the most illiquid hours of the day when Japan was on holiday were all blamed for the “flash crash” on USD/JPY. However, in the most liquid hours when New York and London overlap, we see the US Dollar down across the board. It is not only dollar/yen but the greenback in general.

EUR/USD tops 1.1400, GBP/USD is flirting with 1.2600, and USD/JPY is resuming its falls at full volume.

Here are three reasons for the fall:

1) Kaplan open to cutting QT

Just before Christmas, Fed Chair Jerome Powell broke markets’ hearts by saying that the balance sheet runoff will continue on auto-pilot. This comment overshadowed the otherwise dovish hike: the Fed reduced its forecast for rate hikes in 2019.

But now, Dallas Fed President Robert Kaplan says that this reduction of the Fed’s balance sheet, also known as Quantitative Tightening, may be reconsidered. The Fed is currently limiting the reinvestment of maturing bonds it bought in the QE years. The gradual move, described by the then Fed Chair Janet Yellen as “watching paint dry” is drawing money from stocks.

If the Fed is now open to halting this process, there may be more dollars running around, thus pushing the value lower.

2) China does not take a bite from the Apple

The iPhone maker may be facing a saturated market for smartphones and not only an issue with China, but its revenue warning came on top of other data showing a slowdown in China and growing worries about the world’s second-largest economy.

The US is doing better than China and may be “winning” the trade war, but in trade - just like in a real war, everybody loses. The shockwaves also add to the odds that the Fed will slow down or halt.

3) Forward-looking fall

The ISM Manufacturing PMI plunged to 54.1 points, much lower than early expectations and a plunge from 59.3 points. The new figure represents a weak growth looking forward. While the sector is small in comparison to the services one, the bellwether sends shockwaves around markets.

What about the upbeat ADP NFP? Employment is a lagging indicator, not a forward-looking one, and markets are used to upbeat employment figures. The downbeat ISM number strengthens the narrative of a Fed slowdown.